How a loophole let charter schools 'buy' buildings and still collect rent from state

Like many charter schools, Executive Education Academy spends a good chunk of its budget on rent, some of which is later reimbursed by the state. That’s allowed, as long as the school doesn’t own its building, which Executive Academy doesn’t — technically.

The school at 555 Union Blvd., Allentown, is owned by the Executive Education Academy Charter School Foundation, a nonprofit set up solely to support the school. The school used to pay about $2.2 million a year in rent to a private landlord and get $100,000 back from the state.

Now the school will pay $2.3 million a year in rent to its foundation, which bought the building last summer, and still be able to apply for reimbursements from the state.

“That’s not the reason why we would do this, but that’s a great perk for a charter school,” said Robert Lysek, the school’s CEO. “I hate to say ‘it is what it is,’ but it kind of is.”

The situation is much the same at Roberto Clemente Charter School in Allentown, which uses a building owned by the charter’s founding agency, the Hispanic American Organization.

In 2006-07 and 2009-10, the state returned $190,000 in rent payments to Roberto Clemente because the school technically did not own its building. That didn’t sit well with Auditor General Eugene DePasquale, who in a 2013 report on Roberto Clemente and five other Pennsylvania schools set up similarly, pointed out “the charter school has ownership interests in the building that it is essentially leasing back to itself.” That, DePasquale said, “violated program parameters.”

He called on then-Gov. Tom Corbett’s administration to close the loophole, saying, “The charter schools are funded by tuition payments from school districts and should be focused on providing the best possible education for students, not looking for additional revenue streams funded by taxpayers.”

But the loophole wasn’t closed. Roberto Clemente did not pay the state back because it wasn’t legally obligated to. Since DePasquale issued his report, more charter schools have opened under the arrangement he flagged.

The Education Department paid almost $7.5 million in lease reimbursements to charter schools statewide last school year, based on a per-pupil formula. While many charter schools have no connection to their landlords, others have the kind of close ties DePasquale called “improper.”

“The problem is that [the Education Department] makes no effort to verify ownership of the buildings or look for conflicts of interest between the school and related parties,” DePasquale said in an audit last year of Propel Charter School in Allegheny County, whose director reportedly is closely connected to the landlord. “They simply write a check for whatever amount the charter school submits.That is a disservice to Pennsylvania students and taxpayers.”

The Education Department doesn’t see it as a disservice and has no plans to change course. The school code “does not contain language to indicate a legislative intent to restrict charter school lease reimbursements when the building is leased from a foundation established to support the charter school,” Casey Smith, state Education Department spokeswoman, said.

State Rep. James Roebuck is looking to change that. As Democratic chairman of the House Education Committee, Roebuck, of Philadelphia, introduced a bill last April that would end conflicts of interest in lease reimbursements for charter schools. The bill is at the committee level.

Conflicts of interest under that bill would include leasing from a foundation that shares members with a charter school, said Erin Dixson, a research analyst with Roebuck’s office. That’s been a “common practice,” she said, adding that it drains dollars that should be going toward education.

Officials at Executive Education Academy have close ties with the foundation. Lysek not only leads the school but is the foundation’s president. Bruce Johnson, the school’s chief of staff, sits on the foundation board. Barry Dobil, president of the school’s board of trustees, is also a foundation member.

DePasquale has not audited the school and declined, through his spokeswoman, to comment for this story.

“The auditor general has been pretty clear in previous findings for other charter schools that lease reimbursements involving related parties are improper,” spokeswoman Susan Woods said.

The Executive Education Academy Foundation bought the school’s building for $32.5 million through a bond in August, according to property records. It did not do that just to receive lease reimbursements, Lysek said.

“We’re not here to double dip,” he said. “We’re here to be financially responsible and we believe that in acquiring this property, we’re doing just that. If the law changes, we’ll abide with the law.”

Charters at a disadvantage

The academy is in its fourth school year, opening in 2014 with students in kindergarten through eighth grade, then adding high school grades. Its current enrollment is about 1,100, which school leaders hope will grow to 1,300. Next year, the school will have its first 12th grade class.

Academically, Executive Education Academy’s scores are among the lowest in the Lehigh Valley on state reading, math and science tests, Education Department reports show. But the school has made strides in closing the achievement gap and in academic growth, according to its School Performance Profile, the state’s annual report card for grading schools.

For almost three years, the school paid rent for the former Agere building to a property management group. Its leaders figured that if they asked the landlord for permission to add a gym and expand other parts of the building, the rent likely would soar.

Lysek said that on the advice of the school’s previous solicitor and former business officer, the foundation bought the building.

The school’s current solicitor, Bill Platt, declined to comment for this story.

Besides the charter school, four tenants rent space in the 473,000-square-foot property that includes five buildings, two of which the charter school uses.

Other tenants include Head Start, CareerLink, the Pennsylvania Revenue Department, and the Pennsylvania Health and Human Services Department. The foundation collects about $1.3 million in rent from all the tenants and plans to use that money for building expenses, Lysek said. Any remaining rent money will flow back to the charter school, he said.

The setup is common, said Ana Meyers, executive director of the Pennsylvania Coalition of Public Charter Schools. At the outset, many charter schools can’t afford to buy real estate, she noted, and the state provides no incentives for them to do that.

“If the charter school owned the building, it would not receive the lease reimbursement, which is financially critical to the charter school, especially if they have been in existence for only a few years,” Meyers said.

Robert O’Donnell, a Philadelphia attorney who represents charter schools, noted that while the state helps school districts with building construction costs, that’s not the case for charter schools.

“It’s awfully tough to start from scratch,” he said. “It’s like living in an apartment for a while and then figuring out how you’re going to buy a house.”

To get state reimbursements a charter school has to submit lease payment information to the Education Department. Some choose not to do that.

The Lehigh Valley Charter High School for the Arts, for example, has not asked for reimbursements even though its foundation owns the school building on Third Street in south Bethlehem.

Like DePasquale, CEO Diane LaBelle believes there is some ambiguity in the law. While the Education Department and some other charters see the issue as black and white, LaBelle said, “it’s a very gray area.”

Circle of Seasons Charter School bought its building in May after years of leasing from Penn State-Lehigh Valley. Circle of Seasons has a foundation, but the charter school decided to buy the building on its own. When Penn State owned its building, Circle of Seasons received rent reimbursements, but because of the change in ownership, it no longer will.

Executive Education Academy had a strong relationship with its foundation before one became the other’s landlord, Lysek noted. Every spring, for example, the foundation holds an annual golf tournament that brings in about $9,000 for the school, he said.

The foundation plans to hold more fundraisers, Lysek said, and partner with businesses to benefit the charter school.

AT ISSUE

The state reimburses some rent money to charter schools that don't own their buildings.

Executive Education Academy in Allentown gets that reimbursement because its building is owned by the Executive Education Academy Foundation, which is led by people with close ties to the school.

The Education Department says the setup is legal. But the state auditor general has called such arrangements improper.